AUTHOR: April Wheeler
Everyone wants to reduce their income tax burden. So you may be asking yourself, what are the best tax planning ideas for Canadian taxpayers?
Pension Income Splitting
Canadians with eligible pension income that qualifies for the pension tax credit can allocate up to half of this income to their spouse or common law partner. Tax planning includes determining the optimal allocation that reduces taxes while limiting the impact on Old Age Security benefits.
RRSPs are one of the most important tax planning strategies, especially for those individuals without employer pension plans. An RRSP contribution provides a tax deduction while also allowing the amount to grow tax free until retirement. Essentially, it allows the individual to defer the payment of income taxes on income until retirement when they are likely to be in a lower tax bracket. The 2017 maximum contribution limit is $26,000 or your maximum contribution room as per your notice of assessment.
Registered Disability Savings Plan
If you have a disabled or infirm dependant, the Registered Disability Savings Plan allows parents and others to save for the long-term financial security of the dependant. Although contributing to a Registered Disability Savings Plan does not result in a tax deduction for the parent or others, it does allow the dependant/beneficiary of the plan to withdraw the money in the future tax free.
The government provides grants of up to $3,500 based on contributions to the plans. When funds are withdrawn in the future, the beneficiary is taxed on the amount of the grant received and investment income earned.
Tax Free Savings Account (TFSA)
Open a tax free savings account. Although contributions to a TFSA are not tax deductible like RRSPs, the investment income earned on funds invested in a TFSA are not subject to tax when earned or withdrawn. The other benefit to a TFSA is that your contribution room is replenished the year following each withdrawal.
Income Split with TFSA
Generally when a Canadian gifts shares or other investment to a spouse or child, the attribution rules in the Income Tax Act apply. That means any income earned on the gifted amounts is taxed in the hands of the spouse or child. However, since income earned inside a TFSA is not subject to tax, Canadians can gift investments or shares to a family member’s TFSA without having the income taxed in their hands.
Keep in mind that gifting shares may result in tax on any accrued gain at the time of the gift and any loss will be denied on a gift to a spouse.
Registered Education Savings Plans (RESP)
Registered Education Savings Plans allow you to save money for a child’s education. While RESP contributions are not tax deductible, the income earned on the funds is not subject to tax. The government also provides a grant equal to 20% of a total contributions to an RESP up to a maximum of $500 per year to a maximum of $7,200 per child.
Home Buyers Plan Repayments
If you have withdrawn funds from your RRSP for an eligible first time home purchase, you have to make annual repayments by December 31 of every year. If you do not, the amount of required repayment will be included in your income.
Accelerate Charitable Donations
If you plan on making charitable donations in the near future, consider making them prior to December 31st. This will ensure the donation will qualify for a donation credit on this year’s personal tax return.
Donate Publicly Traded Shares
Donating publicly traded shares to a charity results in a charitable donation tax credit. In addition, the donation of the shares will mean that any gain on the disposition will not be subject to capital gains tax.
A little planning ahead can result in tax savings for yourself and your dependants in the future. For more information on how to reduce your income tax burden, please contact your McCay Duff advisor.